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ECB Minutes Show Lagarde Will Inherit a Fractured Institution -- Update

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10/10/2019 | 09:25am EDT

By Tom Fairless

Top European Central Bank officials squabbled over key elements of the bank's latest monetary stimulus package, according to minutes of the meeting, underscoring the challenge facing incoming President Christine Lagarde to heal internal fractures and support the region's faltering economy.

The ECB last month rolled out a sweeping set of stimulus measures that included interest-rate cuts and an open-ended EUR20-billion-a-month ($21.9 billion) bond-buying program.

The decision to restart bond purchases, which were only phased out last December, was opposed by at least seven top ECB officials, as well as by an internal ECB committee tasked with evaluating its monetary-policy strategy. The ECB's top German official, Sabine Lautenschläger, said last month she would leave the bank two years early after opposing fresh bond purchases, known as quantitative easing, or QE.

The minutes of the ECB's Sept. 11-12 meeting lay bare the dispute, which centered on QE but also extended to other policy tools including interest-rate cuts.

"A number of members" of the ECB's rate setting committee opposed the decision to restart QE, arguing that it should be used only as a last resort, or that it was no longer effective because eurozone bond yields were already so low, according to the minutes.

At least one ECB official warned that restarting QE could create appetite among investors for even more bond purchases, which could exhaust the supply of eligible debt that the ECB could buy. Expanding that pool of debt could raise fresh concerns around the legality of the QE program, which faces lawsuits in Germany.

Some ECB officials called for an interest-rate cut larger than the 0.1-percentage-point reduction agreed last month, which took its key interest rate to minus 0.5%, according to the minutes. But others opposed even a 0.1-point cut, warning of increasingly adverse side effects from negative interest rates.

A number of officials also expressed reservations about the ECB's decision to introduce a system to protect banks from the impact of negative rates.

Write to Tom Fairless at tom.fairless@wsj.com

Corrections & Amplifications

This was corrected at 9:50 a.m. ET because the original version incorrectly stated in the seventh paragraph that the bank cut the rate to 0.4%. The ECB agreed to cut its key interest rate to minus 0.5%.

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